Crypto Meltdown Leaves Winklevoss Twins Gemini Badly Tarnished

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(Bloomberg) – Signs of a full-fledged crisis were everywhere. Bitcoin was plummeting, the Three Arrows hedge fund was booming, and the fates of several high-profile crypto lenders were suddenly in doubt.

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Yet as panic spread like wildfire last June, the Winklevoss twins, founders of crypto exchange Gemini, hit the road with their rock band, Mars Junction. With Tyler on vocals and Cameron on guitar, they belted out hits like Dont Stop Believin, sounding serene as other businesses backed by easy money, rampant speculation and maybe even fraud crumbled into each other. after the others.

And why not? The brothers, who turned their old Facebook millions into crypto billions, were bona fide believers who survived previous downturns. With Gemini, they decided to prove to the world that they were the ones investors could trust. Throughout the summer, they backed their own loan product, Gemini Earn, which garnered billions in deposits with interest rates of up to 8% even as trouble began to engulf their only partner. Earn, Genesis Global.

Yet two months after Genesis suddenly halted withdrawals and forced the twins to suspend redemptions on Earn accounts, it’s harder than ever to believe their customers will get back the $900 million that’s still stuck in limbo.

The Winklevoss brand is badly tarnished, said Aaron Brown, a crypto investor who writes for Bloomberg Opinion.

On Tuesday, Cameron Winklevoss accused Barry Silbert, whose company owns Genesis, of defrauding Gemini Earn customers and called on his company’s board to fire him, deepening acrimony between former business partners . In a separate notice to Earn customers, Gemini said they have terminated their loan agreements with Genesis, a move that officially ends the Earn program and requires Genesis to immediately return all outstanding assets.

The story continues

In an interview on Tuesday, Cameron Winklevoss said he and his twin brother were working around the clock to find a solution for all Earn users. He added that we believe in this space. It’s a painful episode, but everyone is looking forward.

publicity stunt

Digital Currency Group, the parent company that owns Genesis, responded to Tuesday’s letter calling it another desperate and unconstructive publicity stunt by Cameron Winklevoss to deflect blame and that he preserves all legal remedies in response to these malicious, false and defamatory attacks.

A Genesis spokesperson said the company was disappointed that Gemini was conducting a public media campaign, but remained focused on finding a solution to a very complex process and that would take longer.

Silbert himself could not immediately be reached for comment. Last week he refuted accusations of mismanagement in response to an earlier letter from Winklevoss.

The predicament is humbling for the 41-year-old crypto entrepreneurs, whose fortunes and reputations rested on the proposition that they were the adults capable of taming the frontier of crypto for the rest of the world. The episode raised questions about whether their seemingly unshakable belief in crypto has left Gemini, and their customers, unprepared for the worst.

Gemini launched its Earn product in February 2021, offering investors a way to earn interest that far exceeded traditional bank account rates. It did this by allowing depositors to lend their crypto to Genesis, which in turn loaned those coins at even higher rates to large crypto traders making leveraged bets.

Limited Liability

Importantly, Gemini did not lend the funds itself, acting only as an agent between Earn’s clients and Genesis. In August 2021, Gemini announced that Earn accounts exceeded $3 billion.

While the issues with Gemini Earn came to light in November, within the company questions about its risk management surfaced much earlier.

Since early 2021, employees have been urging the twins to find more quid pro quos to help isolate Gemini and its customers if Genesis runs into trouble, according to a person familiar with the matter. That never happened, in part because it proved difficult to find other counterparties that met Geminis’ risk and regulatory requirements, said the person, who is not authorized to do so. express publicly. Gemini declined to comment on its diversification plans for Earn counterparties.

Prior to removing the Earn product from its website, Gemini said accredited borrowers in Earn (i.e. Genesis) were vetted through our risk management framework which reviews the process of managing warranty from our partners. The company also said it periodically reviews its partners’ cash flow, balance sheet and financial statements.

Winklevoss worshipers have a big problem in Genesis Halt

By September, two major crypto firms, Celsius and Voyager Digital, had gone bankrupt; BlockFi, a loan company the Winklevosses invested in, was headed for bankruptcy; and the once booming industry seemed virtually dead.

According to a report last week by The Information, the twins decided to officially end the Earn product that month, but that involved negotiating with Genesis and figuring out what would likely have been a time-consuming plan to unwind the accounts and return money to customers. Gemini declined to discuss the report at Bloomberg’s request.

In limbo

Publicly, Gemini still marketed Earn and supported the product. Then, in November, the Sam Bankman-Frieds FTX empire shocked the crypto world by filing for bankruptcy.

Since then, Gemini Earn customers have been forgotten.

Initially, the Winklevoss twins advised customers to gain patience and pledged to work with Genesis to get their money back. Now the situation has escalated into a nasty spat.

In his last letter dated January 10, Cameron Winklevoss accused Silbert, his company Digital Currency Group and his Genesis unit of repeatedly misrepresenting Genesis’ financial situation. On January 2, Winklevoss criticized Silbert in a separate open letter for bad faith stall tactics and mixing money within DCG.

In response to the earlier letter, Silbert said in the tweet that DCG presented a proposal to resolve the dispute to Winklevoss advisers on Dec. 29, but received no response.

What happens next is anyone’s guess. But amidst all the accusations and recriminations, this is clear: there is a lot to blame.

The twins, by suggesting through Geminis marketing that Earn accounts were similar to FDIC-insured savings accounts but with much higher rates. Genesis, overextending itself to making risky loans (to the now-bankrupt Three Arrows, for example) with other people’s money. And of course, Earn users themselves, ignoring the very real possibility that they could lose all their money.

Gemini users are fed up. We tackle the Winklevoss twins

Geminis customers could potentially face years of uncertainty. Unlike bank depositors, Earn users would be considered unsecured creditors in the event of Genesis bankruptcy. Last week, a bankruptcy judge ruled that Celsius owned the coins customers deposited into the interest-bearing accounts of crypto lenders. Meanwhile, investors whose funds were stuck on Mt. Gox when the crypto exchange went bankrupt in 2014 have yet to see any money.

For now, Earn’s customers have to nurse their grievances on Reddit, Telegram and other online platforms. Some have filed a class action lawsuit against Gemini, while many others have filed for arbitration.

As for the Winklevoss twins, it looks like they have ample resources if they choose to support Gemini.

Backed by their early bitcoin investments, they are currently worth nearly $6 billion, according to Bloomberg. They own 70% of Gemini, which is still expected to generate several hundred million dollars in revenue this year, said a person familiar with the matter, who spoke on condition of anonymity because the information is private. Gemini declined to comment on its finances or the twins’ involvement.

They launched New York-based Gemini in 2014 with an emphasis on strict regulatory compliance and compliance, a stance that may have shielded them from the worst crypto excesses, even though it has probably held back growth when overseas trade flourished.

They’re playing the long game, said Campbell Harvey, a finance professor at Duke University. Often, with a new innovation, there is a disruption. Faulty models are eliminated, risk management practices are improved, and some clear winners emerge.

Either way, the Earn Crisis has left Gemini a much diminished player in a greatly diminished global market.

great expectations

In 2020, Tyler Winklevoss said Bitcoin would hit $500,000, while comparing the dollar to toilet paper. The price of Bitcoin has crashed since then, dropping more than 60% to around $16,800, while the total value of the cryptocurrency market has fallen even further.

While global rival Binance has consolidated its power in recent months, Gemini has lost customers. Ever one of the largest exchanges, its share of global crypto trade fell to 0.16% from 0.45% a year ago, according to data compiled by researcher CryptoCompare.

Gemini announced that it would lay off 10% of its staff in June to cut expenses. This month, Bloomberg reported that Geminis COO Noah Perlman had left the company. It’s a stark contrast to the more heady days, when the twins raised $400 million at the end of 2021, which valued Gemini at over $7 billion.

The Winkle-bros will have to weigh the trade-off between the importance they place on their future reputation and their financial responsibilities, said John Griffin, professor of finance at the University of Texas at Austin. A lot of that may come down to how deep their pockets are outside of crypto.

For Terminal Subscribers: Find the latest crypto market prices on CRYP and the biggest crypto news on TOP CRYPTO.

–With help from Vildana Hajric and Kenneth Hughes.

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